Forces loyal to Libyan strongman Muammar Gaddafi recaptured a town near Tripoli and shelled another in the East, pushing back rebels who however on Thursday won decisive backing from France.
With rebels in retreat coming under heavy artillery fire and being bombed from the air, the head of the international committee of the Red Cross suggested the conflict had escalated into civil war.
Western powers, meanwhile, were meeting in Brussels to mull military and economic options against Gaddafi, who unleashed his forces against rebels after they launched an uprising on February 15 against his four-decade hardline rule.
And Libya's opposition notched up their first international success when France recognised their national council as the country's 'legitimate representative', after President Nicolas Sarkozy met in Paris with its envoys.
In Eastern Libya, Government forces on Thursday closed in on rebel-held Ras Lanuf, sending shells slamming into the town centre and bombarding its Western approach, while carrying out an air strike behind rebel lines, reporters said.
At least four rockets exploded inside the centre of Ras Lanuf, falling near the hospital and a mosque where rebel fighters had just minutes before finished praying, reporters added.
Doctors and medics were fleeing the premises in panic, on foot and crushing into ambulances, taking patients with them.
"They're getting too close. Some of us are still there, but a lot of us are pulling out. They're getting too close," shouted one rebel.
As Gaddafi's forces advanced, two pick-up trucks mounted with machine guns crashed into each other on the outskirts of Ras Lanuf as they revved up in panic to retreat.
"Anyone who has been trained to use the Grad (missile), please come," shouted one rebel into a megaphone.
Ambulances raced back from the front towards rebel-held towns further east as rebels hit the sand to cower from the incoming fire.
"Where the hell are you going? You're going to die a useless death," one rebel soldier shouted at a group walking head-long into the direction of incoming shelling, carrying just Kalashnikovs.
Reporters said smoke still plumed out of an oil facility on the outskirts of Ras Lanuf, where a series of massive explosions erupted into giant fire balls on Wednesday, but that live flames were no longer visible.
National Oil Corp boss Shukri Ghanem played down the importance of the damage to the facilities saying it had not affected production, but acknowledged that oil output was down more than two-thirds due to the turmoil in the country.
Crude prices rose in Asian trade, with New York's main contract, light sweet crude for April delivery, rising 46 cents to $104.84 per barrel.
Brent North Sea crude for April rose 26 cents to $116.20.
Fighting in eastern Libya has killed at least 400 people and wounded 2,000 since February 17, medics there said.
An intense battle for control of Zawiyah, a prosperous dormitory town 40 kilometres (25 miles) west of Tripoli, ended in victory for Gaddafi's forces on Wednesday night, a number of concordant sources said on Thursday.
"The town is now under the army's control," said a resident reached by telephone, who asked to remain anonymous.
"The fighting ended last night. Today the situation is calm. I'm taking the opportunity to leave the town with my family. I'm heading for Jedayem," he added, referring to a small village three kilometres (about two miles) west of Zawiyah.
The town had been under assault for several days by Gaddafi's forces using artillery and tanks.
Rebels had overrun Zawiyah, where many military officers have their homes, soon after a popular uprising against Gaddafi erupted on February 15.
Three BBC journalists who tried to reach Zawiyah earlier this week were 'detained and beaten' before being subjected to a mock execution, the broadcaster said.
"This is yet another example of the horrific crimes being committed in Libya," a British Foreign Office spokesman said.
In Brussels, NATO and European Union meetings bring together defence ministers, foreign ministers and prime ministers or presidents over 48 hours of talks that will shape the prospects for military intervention via a no-fly zone, humanitarian aid and economic props.
Britain and France are lobbying for a United Nations Security Council imprimatur for a no-fly zone. But anxious Washington wants any military action conducted under the banner of the North Atlantic Treaty Organisation, with Arab regional backing seen there as essential.
France on Thursday became the first country to recognise Libya's opposition national council and will send an ambassador to the rebel-held city of Benghazi, officials on both sides said.
"France has recognised the national transition council as the legitimate representative of the Libyan people," one of the council's envoys, Ali al-Issawi, told reporters after meeting with French President Nicolas Sarkozy.
"On the basis of this recognition, we are going to open a diplomatic mission, that is our own embassy in Paris, and an ambassador from France will be sent to Benghazi," he added.
"This ambassador will be in Benghazi for a transition period before returning to Tripoli."
The move was hailed by opposition leaders in Benghazi, their stronghold in eastern Libya, who also called on other European countries to follow suit.
ICRC president Jakob Kellenberger said he was bracing for an escalation of of the conflict in Libya.
"We always have to prepare for the worst. In this specific case, we have to prepare for a further intensification of the fighting," he said in Geneva.
"My understanding now is that we have now a non-international armed conflict and I have no problem with the term civil war."
Elsewhere in the volatile Middle East, Yemen's President Ali Abdullah Saleh bowed to pressure after a month of violent protests, but his pledge to devolve power to parliament was swiftly rejected as too late by the opposition.